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Inditex 1Q20 sales drop limited to 44% despite up to 88% of stores closed

Online sales up 50% in 1Q20 and up 95% in April alone

Group’s Executive Chairman Pablo Isla has unveiled the Group’s plan for 2020-2022, providing a glimpse into the future at Inditex, shaped by capital expenditure of €1bn to boost online and an additional €1.7bn to further integrate the store platform.

The year-on-year contraction in sales at Inditex was limited to a 44% decline to €3.3bn during the first quarter of 2020 – between 1 February and 30 April – despite as many as 88% of the Group’s stores being closed at some point during the period due to the Covid-19 pandemic. Online sales recorded strong growth of 50% during the period, specifically increasing by 95% year-on-year in April. The gross margin remained constant at 58.4% of sales, evidencing the flexibility embedded into the business model and its ability to react to actual demand. At the April 2020 close, inventories were 10% lower than in April 2019. Operating expenses decreased by 21%, thanks to active cost control during the period, and notwithstanding the company’s role in supporting the health emergency by earmarking funds and all of its logistics capabilities to transporting over 120 million items of medical and health equipment, donated by private and public entities including Inditex, from China to Europe

Inditex unveils its proprietary digital platform, which will be completed during the period. It is a tailor-made IT architecture for the integrated store and online business model. By 2022, online sales are expected to account for over 25% of the total, compared with 14% in FY19.

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Inditex will broaden and complete its store technology upgrade plan, which will continue the policy of opening larger stores and absorbing smaller units. Each store, whether online or physical, will become a sustainability hub: they will use less and renewable energy, eliminate single-use plastic, recycle all materials and foster the reuse of all garments.

“Isla today committed that the Group will invest €1 billion in bolstering the online business and a further €1.7 billion in upgrading the integrated store platform, deploying advanced technology solutions.”

.The company’s net cash position remains robust, at €5.8 billion, compared to €6.7 billion as of April 2019, underpinned by the longstanding positive momentum in the business coupled with the Group’s robust financial management. Combined, the above factors mitigated the impact on Inditex’s first-quarter, which amounted to an EBIT of €-200 million and net loss of €-175 million. The company has decided to make a provision of €308 million related to the execution of the Plan to boost online and further integrate the store platform. Taking the provision into account, the reported EBIT and net profit stood at €-508 million and €-409 million, respectively.

€2.7 BILLION FOR THE 2020-2022 PLAN

Inditex’s Executive Chairman, Pablo Isla, today unveiled the Group’s plan for the next two years, providing insight into the future strategy of Inditex. Under that plan, the company will accelerate and broaden its forward-looking digital transformation strategy. Isla today committed that the Group will invest €1 billion in bolstering the online business and a further €1.7 billion in upgrading the integrated store platform, deploying advanced technology solutions.

The overriding goal between now and 2022 is to speed up full implementation of our integrated store concept, driven by the notion of being able to offer our customers uninterrupted service no matter where they find themselves, on any device and at any time of the day

Starting from the e-commerce platform, it layers in all the associated processes, including inventories, purchasing, distribution and orders, injecting flexibility and, vitally, scalability. Scalability is crucial in the ability to maintain excellent service during periods of peak traffic such as sales seasons and is key to readying the company for the anticipated ramp-up in online sales.

ONLINE, OVER 25% OF TOTAL SALES

Inditex expects online sales to account for over 25% of the total by 2022, compared with 14% in FY19, underpinned by an integrated online-store network that is structurally nimble, sustainable and smart. It will have larger, higher quality stores, higher levels of profitability, and helping generate 4-6% like-for-like growth annually. Each store will act as a fashion distribution hub in the heart of the most strategic shopping districts of the world’s leading cities, forging an interconnected global distribution network that is responsive to emerging shopping habits.

“Inditex expects online sales to account for over 25% of the total by 2022, compared with 14% in FY19, underpinned by an integrated online-store network that is structurally nimble, sustainable and smart. It will have larger, higher quality stores, higher levels of profitability, and helping generate 4-6% like-for-like growth annually.”

Ultimately, Inditex plans to have a total network of between 6,700 and 6,900 stores, from 7,412 today, which will involve opening 450 new stores fitted with all the latest sales integration technology and absorbing between 1,000 and 1,200 smaller-sized stores, which account for 5% to 6% of total sales and are less well positioned to offer the new customer experiences. Most of these smaller stores are older stores belonging to brands other than Zara.

By region, the plan envisages giving a definitive boost to certain brands’ online sales platforms, specifically those of Bershka, Pull&Bear and Stradivarius in China and Japan; in Spain, the Group will continue the process underway for the last three years of opening larger stores while absorbing smaller ones, as observed in cities such as Bilbao and Pamplona; in the Americas and the rest of Europe, the priority will be to consolidate the strategy driving full integration of the physical and digital worlds.

Thanks to this platform, using the data generated by the RFID system, Inditex can seamlessly bring up all of the latest fashion creations on any device in real time; track demand with no time lags; manage stocks with the utmost efficiency; and accurately fine-tune production, all of which is in line with the Group’s sustainability objectives by ensuring no excess.

Those measures will be accompanied by the strategic raw material initiatives committed to at the 2019 AGM: the majority of fabrics used to make clothing sold by any of Inditex’s eight brands will be sustainable, organic or recycled by 2025; that target will be delivered sooner for fibres such as viscose, which will be 100% sustainable in 2023.

GROWTH OF THE INTEGRATED STORES AND ONLINE PLATFORM

The Group also continued to make progress on the target announced by Pablo Isla of having all of the products of all of its brands available for purchase online anywhere in the world by the end of 2020. In parallel, the Group’s brands opened 19 new stores during the quarter, as well as expanding and refurbishing some of their flagship stores in markets including Spain, China, Portugal, Morocco, Lithuania, Croatia, Korea and Saudi Arabia.

“Those measures will be accompanied by the strategic raw material initiatives committed to at the 2019 AGM: the majority of fabrics used to make clothing sold by any of Inditex’s eight brands will be sustainable, organic or recycled by 2025; that target will be delivered sooner for fibres such as viscose, which will be 100% sustainable in 2023.”

An upcoming highlight is the opening of Zara’s new store in WangFujing (Beijing, China). Not only will this be the largest flagship store in Asia, it will also be the most advanced Zara store in the world, featuring the latest technology and services to offer a seamlessly integrated shopping experience. Also scheduled to open are the Zara Place Vendome in Doha (Qatar) as well as newly extended and refurbished Zara stores on Paseo de Gracia in Barcelona, Spain, and the Calle 82 store in Bogota, Colombia.

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BARCELONA PASEO DE GRACIA, THE GLOBAL STORE

Next autumn, Zara will open a three-storey, 800 square-metre space exclusively devoted to Zara Man in an emblematic building adjacent to the brand’s existing store in Paseo de Gracia (Barcelona, Spain), which was reopened last November following refurbishment and the addition of the latest fashion experience-driven technology solutions.

SUSTAINABILITY

The Group’s stores also continued to roll out the usedclothing collection programme: customers can now find collection containers in 2,299 of its stores in 46 markets; the scheme is run in conjunction with 45 organisations which receive the clothing and sort it for reuse or recycling.

As part of the evolution of the eco-efficient store plan, the Group continues to increase the number of stores connected to its centralised energy and water control and management system. Thanks to the technology already fitted and the high rate of connectivity with the centralised platform, a total of 3,587 stores are now operating under this Inergy platform.

In addition, Inditex publicly endorsed the call for action under the International Labour Organization in collaboration with The International Organisation of Employers (IOE), the International Trade Union Confederation (ITUC), IndustriALL Global Union and other brands to mobilise support for manufacturers and workers through the economic disruption caused by Covid-19.

SECOND QUARTER

The start of the second quarter has been marked by the gradual reopening of stores in a number of markets and growth in online sales. Since the start of May, the Group has been reopening its stores, at all times prioritising customer and staff safety. As of 8 June, 5,743 stores of Inditex’s 7,412 were open, in 72 markets.

Sales have been recovering gradually as the stores have reopened, with certain markets such as China and South Korea and, in Europe, Germany, standing out. With 52% of its stores open in May with capacity restrictions in most markets, store and online sales in local currencies were -51% compared to last year’s revenues.

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